Stock Sell Decision
It is a lot easier to buy a stock than it is to sell. The reason, when you strip away everything else, comes down to emotion and psychology. If we have a stock that is losing value, we do not want to sell because we lose money. But then if a stock is rising in value we hate to sell.
I have owned quite a few stocks that have appreciated in value. One example is a pipeline that has increased 150 percent from the market bottom in March of 2009. Pipelines tend to be conservative, “sleepy,” investments; during bullish times these are less attractive because they are typically lower yielding. When the market is bearish, however, the public flocks to investments like these because they are dependable and relatively stable.
No one wants to sell something that is working, but I have advised clients to do just that. I hear things like, “Why are you selling that?” “Why would you sell my best performer?” “Are you crazy?” Good decisions often go against the grain of what the public thinks should happen. So, while it may seem like a good idea to hold onto a stock that has appreciated so greatly, and has not decreased in value, now is the time to sell.
The particular stock that I referred to above is getting toppy. It is reaching highs that are not sustainable, and a decrease is likely. Could it continue to rise in value? Sure, it could. But it is more likely that it will begin to correct itself and settle at a lower value. When it does it takes your profits with it. A big gain is inevitably followed by a stagnant period and usually a decline. Take your profits and move on.
Investment Advice – Do Your Homework
One of my rules is do your own research, and I would like to use the hot emerging market country of Brazil as a study example. People are drawn to investments based on headlines and then forget about the facts required to make sound follow up decisions.
If you want to invest in a country, you must get a better sense of where the country is, where it is going, what its people are doing, and the progress they are making. There is more to a country than its most recent market closing. Factors like the birth rate, infrastructure, and health care are influential. How many new millionaires are there in that country? Is the GDP growing? Are the people eating more meat? Are companies paying dividends or are they still in a stage where they are prospecting?
Knowing that credit and consumption is on the rise in Brazil; that there are now 210 televisions per 1000 people and 429 computers per 1000 people; and that a national pension system has been instituted can be helpful. Despite all of the above it is worth knowing that 90 percent of the country is jungle. It is very difficult to access. Transport is difficult along the coast, which has a very poor system of roads, and the river system does not lend itself to inter-city travel.
We tend to lump emerging markets together and Brazil, Russia, India, and China are traditionally classified in the same basket. But, if you take a moment to think about it, why would Brazil and Russia be in a basket together, any more than Canada and Australia would be? Another issue with emerging markets in general is that in your quest to diversify, you are not simply duplicating what you can get in Canada. Brazil is largely commodity based. They are strong in metals, food, and energy – all things that investors can find in Canada.
Manage Investments Like Your Business
The primary focus of an entrepreneur should always be on their business. Thus, this is where their highest rate of return should always be. Nobody can question this. A key reason for this is that they do a very good job of properly allocating company assets and costs such as equipment, people, technology, and buildings. Plus they connect the dots between these assets. This is the essence of diversification.
But an astute small business owner also knows that having all assets inside the firm probably isn’t a healthy practice. So they begin to invest externally. However the same thinking that was successful for the internal assets does not get applied to the external assets. These investments seem to get separated from each other and managed as if each of them was the only investment. A rental apartment here and another one there, cash at three different banks, home for this purpose and a cottage for that, stocks with Tom and bonds with Bill. Expenses are mingled and the assets are never connected into a big picture. It becomes very difficult to accurately gauge your total real net rate of return.
I would suggest that you look at your external investments as a whole, instead of separate entities. Put it all into one package in your mind. Managing your assets does not have to take over your life. Start by simply creating a spreadsheet. Many people are surprised to see what they have – or don’t have. If your home accounts for 56% of your wealth, put that on the spreadsheet. If stocks and bonds account for 6%, get it down. Put it all out there on a piece of paper so you can see it. This first step is always surprising.
The Current Big Picture – February 1, 2012
Before an entrepreneur makes an investment in their business they take a step back to analyze some key factors. Likewise, before an investor starts to assemble an investment strategy they should do the same. I call this getting the big picture right. Below is a collection of personal thoughts that forms the basis for my current big picture.
1. The world is in a balance sheet depression resulting from a 40-yr period of debt accumulation. We will suffer rolling recessions for another 3-5 years.
2. There will be stock market rallies but they will not be long term like the good old days. It will still be possible to make reasonable returns in these periods but an investor must be nimble.
3. We are in a period of extreme over-indebtedness, and once there it takes a very long time to accept and then resolve the real problem. Extreme debt distorts the usual business cycle. We can’t simply look at growth and productivity numbers for the last 30 years and make similar forecasts going forward.
4. Somehow we arrived at a place where we believed that financial transactions by themselves create prosperity. They do not. Only hard work, creativity and risk taking do. High debt doesn’t encourage this.
5. Countries can’t inflate their way out of debt. We are past that point, as debt is too high. There may have to be a ‘great reset’ where defaults are accepted and everything is made whole again. This would not be a pretty picture.
Small Business Owners: Take Inflation Into Account
When planning for the future, it is imperative that entrepreneurs take inflation into account. The 3% figure that you hear in the media is really just core inflation. A few years ago the government decided not to include food and energy (two areas where costs have increased most for consumers) in this number. When these and some other key items are properly accounted for, the actual inflation rate may be in the 8-9% range.
So what does that really mean?
Say you have $1 that you want to maintain over the course of 10 years. You do not want to grow the money, or lose it. You just want your dollar at the end of those 10 years. If you keep it in a drawer you will not maintain that $1. Even with the misleading rate of 3%, at the end of year one you have $0.97 and it steadily decreases from there until you have about seventy cents.
We must also realize that whatever the rate is, it will not be the one that applies to us. This is because inflation is specific to individuals, not groups. If you are elderly then the cost of drugs are critical. If you are a teenager you are more concerned the pricing of communication devices and music. If you own an electrical contracting business the cost of copper is on your mind.
It is easy for busy small business owners to focus solely on dollars needed today, but we need to always factor in all deductions. Besides inflation, you have taxes and fees. When choosing an investment strategy or pursuing a business opportunity, think ‘final ROI’. Using the top tax rate and the real inflation rate, a planned $100 profit is really less than $50. Ensure to build in extra income so your money is worth what you need it to be when you are ready to use it.
